Low growth, price cuts plague euro zone, haunt ECB

(Reuters) – Euro zone business growth picked up less than expected in October despite another, deeper round of price cuts, according to surveys that are unlikely to ease simmering tensions among the bloc’s central bankers.

Companies have been discounting prices for over 2-1/2 years and did so last month more steeply than at any time since early 2010, when the single currency area was mired in a sovereign debt crisis.

Weak growth in services and manufacturing despite further discounting will add to pressure on the European Central Bank on the eve of a policy meeting, as it seeks ways of warding off deflation and bringing inflation – at just 0.4 percent in October – out of what it terms the danger zone below 1 percent.

Markit’s final Composite Flash Purchasing Managers’ Index, based on surveys of thousands of companies across the region and seen as a good indicator of growth, was all but unchanged from September’s 10-month low of 52.0, coming in at 52.1.

“Such a weakness is worrying, as it highlights the feeble nature of demand in the euro area and adds to growth concerns. Forward-looking components in both sectors proved to be disappointing,” said Apolline Menut at Barclays.

Although the PMI chalked up its 16th month above the 50 line that separates growth from contraction, the expansion came at a cost.

A sub-index for output prices slumped to 47.1 from September’s 48.5, its lowest reading since February 2010 and suggesting firms were desperately slashing prices.

“The euro zone still faces a significant deflation risk. Unless there is a sustained, clear change in the euro zone’s fortunes, the ECB could yet ultimately have to go down the quantitative easing road,” said Howard Archer at IHS Global Insight.

Full-scale QE is one of the last options the ECB has left, and while it is not expected to change tack at Thursday’s policy meeting, there is now an even chance it will eventually buy sovereign bonds, a Reuters poll found this week. [ECB/INT] [ECB/REFI]

For such a stimulus program to be effective in boosting inflation, a Reuters poll said the ECB would need to expand its balance sheet by around 1 trillion euros – a figure in line with what ECB President Mario Draghi said he would target.

But Draghi will come under fire from the bloc’s national central bankers later on Wednesday over what they see as his secretive management style and erratic communication, not least because they had agreed not to release that figure, Reuters exclusively reported on Tuesday.

That rattled markets, and alongside the weak data and sweeping Republican party wins in U.S. mid-term elections that will likely curb the legislative agenda across the Atlantic, it sent the euro sliding back toward recent lows against the dollar.

Shoppers in the 18 countries using the euro ventured out less frequently in September, according to weak retail sales figures also published on Wednesday.

Retail sales are a proxy for household demand, and the data reinforced European Commission forecasts that the euro zone economy will have stagnated between July and September after expanding 0.3 percent in the first quarter and 0.1 percent in the second.

Mounting economic uncertainty also hit growth in Britain’s services industry much more than expected last month, signaling a significant end-of-year slowdown in the country’s recovery.

Wednesday’s Markit/CIPS services PMI sank to a 17-month low of 56.2 in October from 58.7 in September, weaker than even the gloomiest forecast in a Reuters poll of analysts. [GB/PMIS]

Still, no policy changes are expected either when the Bank of England meets, also on Thursday.

Weaker than expected data has now pushed short sterling interest rate futures to not fully price in the first rise in British rates until the second quarter, a view shared by almost half the economists in a recent Reuters poll. [BOE/INT]

“While a rate hike this week is out of the question and February is looking pretty unlikely we think that the economy is strong enough to justify action in 2Q15,” said James Knightley at ING.

The news was no better for the euro zone’s dominant service industry where the PMI dipped to a seven-month low of 52.3 from 52.4 and there was little chance of much improvement this month.

France’s PMI sank further below 50 and Italy’s suggested economic stagnation. The composite index for Germany, Europe’s largest economy, showed the pace of growth had eased from last month.

“The euro zone PMI makes for grim reading, painting a picture of an economy that is limping along and more likely to take a turn for the worse than spring back into life,” said Chris Williamson, chief economist at Markit.